Omega prepares financial statements under International Financial Reporting Standards. In the year ended 31 March 2007 the following transactions occurred:
Transaction 1
On 1 April 2006 Omega began the construction of a new production line. Costs relating to the line are as follows:
Amount
Details..................................................................................................$000
Costs of the basic materials (list price $12.5 million less a...........10 000
20% trade discount)
Recoverable sales taxes incurred not included in the....................1000
purchase cost
Employment costs of the construction staff for the three...............1200
months to 30 June 2006 (Note 1)
Other overheads directly related to the construction.....................900
(Note 2)
Payments to external advisers relating to the construction...............500
Expected dismantling and restoration costs (Note 3)....................2000
Note 1
The production line took two months to make ready for use and was brought into use on 31 May 2006.
Note 2
The other overheads were incurred in the two months ended 31 May 2006. They included an abnormal cost of $300 000 caused by a major electrical fault.
Note 3
The production line is expected to have a useful economic life of eight years. At the end of that time, Omega is legally required to dismantle the plant in a specified manner and restore its location to an acceptable standard. The figure of $2 million included in the cost estimates is the amount that is expected to be incurred at the end of the useful life of the production plant. The appropriate rate to use in any discounting calculations is 5%. The present value of $1 payable in eight years at a discount rate of 5% is approximately $0.68.
Note 4
Four years after being brought into use, the production line will require a major overhaul to ensure that it generates economic benefits for the second half of its useful life. The estimated cost of the overhaul, at current prices, is $3 million.
Note 5
Omega computes its depreciation charge on a monthly basis. Note 6
No impairment of the plant had occurred by 31 March 2007. Transaction 2
On 31 December 2006 the directors decided to dispose of a property that was surplus to requirements. They instructed selling agents to find a suitable purchaser and advertised the property at a commercially realistic price.
The property was being measured under the revaluation model and had been revalued at $15 million on 31 March 2006. The depreciable element of the property was estimated as $8 million at 31 March 2006 and the useful economic life of the depreciable element was estimated as 25 years from that date.
On 31 December 2006 the directors estimated that the market value of the property was $16 million, and that the costs incurred in selling the property would be $500 000. The property was sold on 30 April 2007 for $16.1 million. Omega incurred selling costs of $550 000. The actual selling price and costs to sell were consistent with estimated amounts as at 31 March 2007.
The financial statements for the year ended 31 March 2007 were authorized for issue on 15 May 2007.
Required:
Show the impact of the above transactions on the income statement of Omega for the year ended 31 March 2007, and on its balance sheet as at 31 March 2007. You should state where in the income statement and the balance sheet relevant balances will be shown.